The Behavioral Paradox: Why Investor Irrationality Calls for Lighter and Simpler Financial Regulation

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ABSTRACT

It is widely believed that behavioral economics justifies more intrusive regulation of financial markets, because people are not fully rational and need to be protected from their quirks. This Article challenges that belief. Firstly, insofar as people can be helped to make better choices, that goal can usually be achieved through light-touch regulations. Secondly, faulty perceptions about markets seem to be best corrected through market-based solutions. Thirdly, increasing regulation does not seem to solve problems caused by lack of market discipline, pricing inefficiencies, and financial innovation; better results may be achieved with freer markets and simpler rules. …